The construction of a "social credit system" (“SCS”) is not an entirely new concept in the People's Republic of China (“China” or “PRC”). However, the extent and content of the SCS has been expanded substantially since 2011.
Before October 2011, the SCS was more of a concept in the financial sector. For example, in the Outline of the PRC Twelfth Five-Year Plan for National Economic and Social Development promulgated on March 6, 2011, under the “Strengthening Financial Supervision”, it was proposed to “accelerate the construction of the social credit system and standardize the development of credit rating mechanisms".
On October 18, 2011, the Sixth Plenary Session of the 17th Central Committee of the Communist Party of China proposed to put integrity construction in a prominent position, and for the first time expressed four major areas for the construction of the SCS which goes beyond the financial area. Namely, it is required to vigorously promote the construction of government integrity, business integrity, social integrity and public trust in the judicial sector.
The triggering reasons behind it were mainly a series of malignant food safety incidents such as “poisoned baby milk powder”, “ditch oil”, and furthermore “commercial fraud, counterfeiting goods, fraud in social welfare, academic misconduct and so on”, as criticized by former Premier Wen Jiabao on different occasions in 2011. In addition, he elaborated that " these vicious food safety incidents are enough to show that the lack of integrity and the decline of morality have reached a serious point" and that "the people are very dissatisfied."
Therefore, in October 2011, Wen Jiabao deployed a plan for the construction of a social credit system.
On June 14, 2014, the State Council issued A Notice on the Plan for the Construction of the Social Credit System (2014-2020), the so-called "SCS Plan". The introduction of this road map marks a new era in which the construction of the social credit system has entered a period of rapid and full-fledged development.
Who is in the driver’s seat?
The State Council has set up an inter-ministerial joint meeting on the social credit system construction ("Joint Meeting") to coordinate the work related to the construction of the social credit system. It is jointly led by the National Development and Reform Commission (“NDRC”) and the People's Bank of China (“PBoC”).
The Joint Meeting was initially established in 2007 with 14 ministerial units lead by PBoC alone. Now, after many expansions and changes, it has reached to 46 ministerial units according to the latest news report from August 1, 2019.
Officials of NDRC summarized the data infrastructure for the construction of the SCS as “one library, one platform, two websites, four systems.”
- “One library”: refers to a national credit information base database (“国家信用信息基础数据库”) maintained by PBoC for many years mainly for financial credit use.
- “A platform”: refers to the National Credit Information Sharing Platform (“全国信用信息共享平台”, “General Hub”), which is operated by the National Credit Information Center under the NDRC. By connecting to the central departments and all provincial level information hubs, this General Hub is designed to bridge the formerly isolated information islands, covering all credit entities and all credit information categories, so that credit information can be shared across departments and regions.
- “Two websites”: refers to the web portal of the General Hub (note: basically not available to the public except for one or two inquiry links) and the CreditChina (1) website (available to the public).
- “Four systems”: refers to the four pilot projects under the General Hub, including credit catalogue, credit inquiry, joint punishment, and joint incentive systems. Without knowing the details, we assume that such system would allow government departments to collect and consolidate credit information, conduct credit inquiry and implement joint disciplinary and incentives measures.
In addition to the data infrastructure above, government agencies have also procured the “Internet + Supervision” (互联网+监管) system, using artificial intelligence (AI) and big data for regular supervision. How the current "Internet + supervision" system looks like is still unclear. According to the notice of public procurement award issued, the "Internet + Supervision" system will contain the following aspects:
(i) a cloud; (ii) Big Data Center; (iii) Application systems such as law enforcement monitoring systems, risk warning systems and decision-making support systems, video surveillance and fusion command platforms etc.
Credit information collection
Collecting credit information is an important condition for the establishment and operation of a social credit system. In addition to volunteering by companies and whistleblowing, government agencies will actively collect relevant credit information.
One big concern, in particular of foreign invested enterprises, is the scope of such collection. The SCS plan and relevant rules require to define the scope according to law and shall be limited to the catalogues published. So far such public credit information catalogues are not always available on the public internet yet.
As an example, the local normative documents in Zhejiang, Shanghai, Jiangsu and other places indicate that the credit information collected by the government is limited to public credit information (公共信用信息), which is defined as the credit information of various market entities generated by the department's performance of its public functions. The departments that exercise public functions generally include administrative organs, judicial organs, and any enterprises, institutions or social organizations that exercise public management service functions according to law.
Typical public credit information in relation to enterprises, according to the above-mentioned local regulations, generally includes: information of registration, qualifications, certification and approval, dishonesty (such as administrative punishment, administrative enforcement), refusal to implement judicial or administrative decisions, major accidents regarding safe production, food hygiene, environment, product quality etc., unpaid taxes, social security, government funds, administrative fees and Blacklists etc. Positive information includes red listing, voluntary work, charitable donations etc.
Some local regulations explicitly forbid to collect certain information. For example, Shanghai prohibits the collection of natural people's religious beliefs, genes, fingerprints, blood types, disease and medical history information, and other individual-related information that is prohibited by laws and regulations.
How to rate the credit?
The government’s department will conduct two kinds of credit evaluations for various entities: a comprehensive rating on public credit (公共信用综合评价) by the general hub (or plus its local branches) and industry evaluations (行业评价) conducted by the competent departments of various industries (such as the taxation department, as mentioned by NDRC as an example in one interview).
The results of the above evaluations are reflected in certain levels and categories, such as A (excellent), B (good), C (medium), and D (poor) by the General Hub in public credit, or additionally with an E (very poor) in Zhejiang.
Recently, the General Hub completed a comprehensive rating of 33.13 million market entities (2) . In 2017, Zhejiang Province assessed 1.77 million businesses across the province – see summarized in below table (3).
Evaluation index and weights
At present, there is no mandatory evaluation index (at least not available to public) at the national level. According to the indexes disclosed in Zhejiang Province, a company will be rated in five dimensions: basic business conditions, finance and taxation, governance ability, law-abiding and social responsibility.
To be specific, there are 16 scoring items with different weights. In summary, being listed on the blacklist weighs the most; followed by various of "failure to perform effective (administrative or judicial) decisions, penalties or enforcement" and several administrative penalties. Blacklistings and criminal records of the legal representative also count. Work safety incidents and fire risks will also affect the score. “Smaller mistakes” may lead to a decrease in scores, for instance in case of a failure to pass the spot product quality check by the market supervision department, or the failure to properly perform the annual reporting obligations.
Such indexes used in Zhejiang are indeed more of “public” information: information generated by the public sector (such as government, courts, etc.). So far, at least in Zhejiang, pure “private” credit information (e.g. company A delays its payment to company B) is not included, unless such payment obligation is confirmed by public organs (e.g. in form of not performed judicial decision etc.)
Other subjects under rating
As stated at the beginning of the article, the SCS also covers governmental integrity. Therefore, among others, we see that the government departments are also subject to credit rating in Zhejiang Province.
Classification and differentiated supervision
The result of the credit evaluation is that the companies are divided into different credit rating categories. Accordingly, the regulatory authorities will adopt different regulatory measures: for market entities with better credit and lower risk, the proportion and frequency of random inspections can be reasonably reduced to limit the impact on normal production and operation; while for market entities with a bad rating, the inspection frequency will be appropriately increased.
In short, the companies with bad rating result will be subject to more strict supervision and disciplines according to the law. NDRC further confirmed such understanding in one of its media interviews, and clarified that the results of credit ratings are not directly used for deciding of blacklist (4). This is also reflected in Zhejiang's credit rating indexes: the blacklist will affect the credit rating, not the other way around.
For example, for customs top rated enterprises, the inspection rate in import and export shall be below 20% of that for general credit enterprises; for dishonest enterprises rated by customs, the average inspection rate shall be over 80%, as provided by relevant rules.
Various lists – joint rewards and punishments
As expressed in many news reports and scattered in policies, the Chinese government believes that the cost of dishonesty was too low in the past, which lead to the downgrading of morality level of the society. To resolve this, joint rewards and punishments are introduced as the core mechanism of the SCS to multiply the costs and benefits of integrity by inviting the participation of other governmental agencies as well as the society.
Such cooperation across governmental agencies as well as some relevant entities is reflected in various levels of the “Joint Rewards and Punishments/Disciplines Memorandums”, which normally would contain the thresholds of relevant lists, cooperation mechanisms, applicable measures etc. By July 2019, there have been more than 50 such memorandums concluded that are applicable to various industries(5) . I.e., different authorities will decide on various of lists based on the memorandums applicable. There is no unified and one-for-all standard.
Types of lists
- Red list (e.g. Level A Tax Payer List / A级纳税人名单): i.e. the one who is qualified to receive joint rewards to honor his/her integrity as confirmed by competent authorities according to the applicable memorandum.
Typical incentives include
- Administrative approval: green channel and acceptance even in case of absence of certain documents; - Favorable position in enjoying public services (e.g. in public procurement); - Utilized administrative inspection (e.g. less inspection); - Easier funding etc.
- Blacklist (e.g. in case of refusal to perform effective judgements): i.e. the one who shall be subject to joint punishment/disciplines as confirmed by competent authorities according to the applicable memorandum.
Typical punishment/disciplines include: - Legal representative or principal of the blacklisted company may not serve as legal representative or principal of any other enterprise within three years; - Publicity of company names on blacklist (e.g. on CreditChina website) - Increase of supervision and inspection frequency; - Increase of punishment extent in discretionary administrative penalty cases; - Disqualification to participate in the development of national standards; - Inability to obtain certain certificates; prohibition from using the self-declaration method to complete the conformity evaluation of the compulsory product certification; - Revocation of the Licensed Pharmacist Registration Certificate of the legal representative or the directly responsible person of the company.
- Besides the above lists, those who have not yet reached the “blacklist” recognition criteria, or those having been withdrawn from the blacklist (e.g. due to expiration of the list) shall be put in a “watch list / 重点关注名单” or “Big Data Warning List/大数据警示名单” for close supervision in case of serious situations.
- The “Big Data Warning List” relies on the national credit information sharing platform to carry out big data analysis, and will be transferred to the “Big Data Warning List” in the main focus list of more than three different key areas, through the “CreditChina” website issuing an early warning to the public. If the main concern of the listed entity is seriously untrustworthy during the validity period, it shall be transferred to the “blacklist” in time according to the “blacklist” recognition criteria.
Updated blacklists and redlists will be published (6) on CreditChina and other websites for a certain period of time. Upon expiration, such periods decided upon by authorities (i.e. expiration of the lists), the website’s publicity will stop, so will joint rewards/incentives or punishment/disciplines.
However, companies may choose to accelerate such expiration by repairing their credits through applying to the publicity website or the administrative penalty agency.
The websites or authorities may require credit undertaking, credit repair training, credit reports etc. to decide on such early expiration.
If the relevant party disagrees with being listed on the “blacklist”, it may submit an application for opposition to the decision-making authority who is obligated to promptly respond to the objection. However, according to some State level policies, the burden of proof seems to lie on the shoulders of the applicants.
Impact on Chinese and foreign companies
First, compliant companies will enjoy at least more convenience in processes related to government departments. Second, there will be more open and trustworthy channels to judge the credit status of the counterparty in business, hopefully reducing transaction costs and risks.
Third, dispute resolution is more efficient – the effective judgments can be enforced to a greater extent than ending up as a piece of paper.
First, besides minding its own credit situation, companies shall also monitor the credit situation of its legal representative as well as its business partners as required by Customs if a company would like to become certificated (i.e. enjoying convenience when handling customs procedures). Negative credit situations of these people or entities will negatively affect the credit situation of the companies. Therefore, the selection and maintenance process and formalities shall be revisited to reflect such new obligations, including but not limited to (1) business partner engagement process; (2) employee handbook and labor contract applicable to the legal representative; etc.
Second, the encouragement of whistleblowers (as mentioned in the information collection/consolidation part) will lead to a surge in internal whistleblowing as we have seen in other jurisdictions. This means that it is increasingly important to establish a compliance system to diminish the incompliance and respond to compliance cases as early as possible. Third, the increase in the ability to collect, consolidate and exchange information allows the government to accurately image companies, regardless of whether the company is willing or not, although the information is currently limited to credit information that anyway are generated by public agencies.
Fourth, the General Hub breaks the formerly isolated information islands among authorities, coupled with the use of big data and AI. In theory, there will be less room for enterprises to hide its incompliance activities by making use of the information asymmetry among different authorities.
The SCS is still in rapid development and iteration. In the near future, the current complicated policy situation will be gradually replaced by higher-level legislation after going through pilots and iterations around the country such as the following legislation: PRC Social Credit Law (draft by department) / Social Letters of the People's Republic of China (Drafting Draft) - discussed by various department on Aug. 30, 2019;
Regulation on Administration of Public Credit Information / Public Credit Information Management Regulations; Measures on Administration of Unified Social Credit Code / Unified Social Credit Code Management.
It is recommended that enterprises maintain close attention to the SCS’s development, address the applicable requirements, analyze the compliance and credit status of the enterprise, summarize weak points, and make timely improvements and corrections. Meanwhile, establishing a compliance system including a whistleblowing system and internal investigation rules becomes increasingly helpful.